Brad Feld

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Unintended Consequences from Frontier

Apr 11, 2008

As I sit here in the San Francisco International Airport (they announce that so proudly over the PA when they tell me that the thread condition is orange every few minutes) I’ve been pondering the unexpected Frontier Airlines bankruptcy.  My Frontier flight is now an hour late so I’ve had plenty of time to surf the web and try to figure out how / why this happened so suddenly.  I’m also almost brain dead from my 10 day trip so it’s hard to actually do anything productive at this point.

I’ve determined that the bankruptcy filing is simultaneously a smart survival move for Frontier and an example of the classic "unintended consequences" (which my dad also taught me result from "complicated mistakes.")  This one is a doozy.  I have no idea what the actual facts are, but the WSJ asserts that the Chapter 11 filing by Frontier was in response to their credit card processor (First Data) increasing they amount and length of time of their holdbacks for credit card receipts.

Let me get this straight. I’m a customer.  I charge a Frontier ticket on my credit card.  First Data processes it but now holds the money until they decide to release it to Frontier.  As a result, First Data effectively controls Frontier’s cash flow (since almost all customer purchases are made on credit cards.)  All right, I got it.

In one of the articles I read, it was stated that First Data increased the holdback percentage from 45% to 100% and the time duration until "the flight was taken."  That strikes me as completely unreasonable on First Data’s part – they now control the float from the moment of purchase until the moment of flight completion confirmation (which I expect is a non-trival reporting process for Frontier.)

Frontier’s response – "Dear First Data: Bullshit.  We are filing for Chapter 11 and invalidate your ability to change the holdback terms.  See you in bankruptcy court."

All the chatter I heard today while waiting for my plane was whether Frontier would be going out of business and whether our plane would arrive.  The fact that is was an hour late didn’t help.  Nor did the fact that the electronic scoreboard announcing the flight time was not working and the gate agent wrote all the info on a piece of paper taped to the wall.  Everyone at Frontier is keeping their chins up and saying "no problem – this is just a technicality."

Hopefully I’ll get home today.  As one of my twitter friends told me – "at least I’m not on American Airlines."